Many of us have just experienced a sudden and unexpected drop in income and if you’re already juggling other debts, the effects of this pandemic could have a severe impact on your finances. You might have been just about managing to make repayments on money that you owe, but this crisis is going to push you into problem debt. Although there may be a lot going on in your life at the moment that makes it easy to ignore debt, the sooner you get help the sooner you can get back on track.
If you think you might have to borrow money
If you don’t have any savings and are facing an emergency cash shortfall, borrowing may feel like your only option. Try and use borrowing as a last resort if you can, and if you need to borrow, make sure you choose the right type of credit or loan for your situation. Otherwise you could find yourself paying a lot more than you need to.
Shop around and compare deals, looking at:
- the interest rate and the Annual Percentage Rate (APR)
- how much you will repay in total and whether you can actually afford the repayments
- if there are any penalties for missed or late payments
- the cost of the loan per week or month and whether this might vary
If you can borrow from family and friends
Borrowing money from family or friends who can lend you cash could be a cheap way of getting extra money without resorting to payday lenders or other types of high cost credit. Family and friends are also likely be more flexible about how you pay the money back. Hopefully this will be a quick and easy short-term arrangement.
Overdrafts, personal loans and credit cards
An overdraft can be a quick way to fund a short-term gap in your income. However, there are changes due to come in from April that could make using an overdraft much more expensive if you plan to use it for more than just a few days. Not all the banks have announced what their overdraft charges are going to be yet, but those that have say their APRs are likely to be around 40%.
If you’re thinking of using your overdraft facility, check with your bank to find out what they are planning to do, particularly in the light of corona virus crisis, and make sure you’re aware of how much it’s likely to cost you.
If you’ve got a good credit rating and you’ll be able to afford the repayments, maybe a small personal loan or a 0% credit card might be a cheaper alternative to cover essential expenses than an overdraft. Do some research on comparison sites for best rate personal loans and credit cards so if you need to apply in a hurry you’ve already done your homework and know who’s offering the best rates.
Help with loans and credit cards
If you’re struggling to repay loans or credit cards because of the corona virus outbreak, you can ask for a payment freeze, or payment holiday, of up to three months. These payment freezes do not cover ‘buy now pay later’ deals and high-cost short-term credit such as payday loans.
How to request a payment freeze:
A payment freeze might not be suitable for everybody. If you can afford your repayments, you should continue to make them. You will be able to ask for a temporary payment freeze from all lenders by 14 April 2020. This is still subject to approval by the lender, but if the payment freeze is denied, your lender should work with you to discuss other options. Taking advantage of a temporary payment freeze because of corona virus will not affect your credit rating.
Do not stop any payments before you’ve agreed a freeze with your lender or credit card provider. You must get this agreed with your lender or credit card provider before stopping payments. Stopping payments before contacting your lender about a payment freeze might be classed as a missed payment, resulting in penalty charges, showing up on your credit file and impacting your ability to borrow money in the future.
At the moment the call centres for banks, lenders and credit card providers are likely to be very busy. Contacting them by email or online might be a good option. The advantage of this is that you can prove exactly when you contacted them.
If you do miss a payment
If there was a delay in arranging a payment freeze and you missed a payment, lender and providers will work with the credit ratings agencies so there will be no negative impact on your credit rating and you should not be charged any penalties. However, you will have to have requested a payment freeze before the payment was due.
What your lender will discuss with you
If you request a temporary payment freeze, your lender is required to explain what this will mean for you in the future. This will include information on any increases to your repayments after the payment freeze ends and any interest payments built up over this time. Firms are not prevented from charging interest during the payment freeze and credit card providers might ask you to make token payments of less than £1 during this time.
Lenders and providers might decide to give you another option other than a three-month payment freeze. If you’re expecting your loss of income to be temporary, for example if you have to self-isolate, you might be offered a payment freeze of less than three months. If you’ve only experienced a partial drop in income, you might be able to make reduced payments rather than take a payment freeze. However, you will need to contact your lender or card provider to discuss these options.
If you’re still struggling with repayments after three months
The temporary payment freeze has been introduced for three months, but it might be extended. If it is not extended, loan and credit card repayments will start automatically once the three-month period ends. If after the freeze you’re still finding it hard to make repayments, you should contact your lender or provider to discuss your options.
If you were already struggling with repayments
If you were already having difficulties making payments before the corona virus outbreak, the new rules will not apply to you. Any agreements you already had in place with your lender or provider, such as reducing or cancelling further interest charges, will continue to apply. If you’re struggling to make loan or credit card repayments, you should speak to your lender or provider about what options are available to you.
What to do if you’re getting behind on car finance payments
Nine out of ten of us now pay for our vehicles on Personal Contract Purchase (PCP) agreements. If you’re going to struggle to meet your repayments because of corona virus, talk to the car finance company as soon as you can. They might offer to extend the cost of the contract which would lower your monthly payments or come to another arrangement to help you out.
The temporary payment freeze introduced by the Financial Conduct Authority (FCA), does not cover car finance specific loan arrangements like PCP or hire purchase. However, if you bought a car using a personal loan, then you might be able to arrange a three-month payment freeze if you’re finances have been affected by the corona virus outbreak.